The JOBS Act and Indie Film Financing

So you think you can crowdfund? This article covers some of the issues the JOBS Act (Jumpstart Our Business Startups) raises as it applies to folks looking to raise money for a film they want to produce.

1. What is it?
Created in 2012 to help small business start-ups, the JOBS Act is comprised of a collection of laws that would make it easier for startup companies — including independent film productions — to raise up to $1 million, particularly through the new phenomenon known as equity crowdfunding.2. How does it change current law?
Currently, Federal law, through SEC regulations mostly, only allows individuals and businesses from making “open calls” or “public solicitations” for investment from high-net-worth investors (generally known as “accredited investors”) or from folks who they have a “substantive relationship” with (Mom or Dad, neighbor, doctor, etc). Current crowd-funding sites like Kickstarter and Indiegogo do not allow investors to receive a percentage of the production, so you have to promise them perks in return – daily email updates on the film’s progress, maybe some signed posters, etc. Under the JOBS Act,however, non-accredited investors can give up to 5% of their income for those earning $100,000.00 (or up to $2,000) or up to 10% of their income if they earn over $100,000 per year (up to $10,000). The total amount raised for the movie cannot exceed $1,000,000.00 during any 12-month period. The investors can receive a piece of the movie in return. Securities acquired pursuant to the crowdfunding exemption will be exempt from registration or qualification under state blue sky laws except that notice filings may be required in the state where the principal place of business is located or where purchasers of 50% or more of the offering are residents. The Act also allows companies using private placement investment (under Regulation D, Rule 506 of the Securities Act of 1933) to make a general solicitation of public offering for investment though this would still only allow them to make that offering to “accredited investors.” This article focuses only on the crowdfunding exception contained in the statute.3.How will it work?
The investors cannot go directly to your movie website to invest. They will have to go through an approved “funding portal” like an investment broker or an SEC-registered and regulated site, as Kickstarter and others will be. That may be the best investment of all, as already-established sites will have a huge jump on the inevitable flood of funding sites that will pop up once the JOBS Act is in full swing. According to the Wall Street Journal, there were 8,800 web domain names registered in the U.S. and Canada in November 2012 that used some form of the term “crowdfunding,” up from only 900 in January 2012.4. What’s the risk for filmmakers?
Generally speaking, if you only take money from high-end investors or family and friends, if your film tanks, or worse never gets made, they are unlikely to sue you. But if you are taking money from newbies you could be asking for trouble. These folks are likely to be double-newbies – new to investment and new to film-making. Try explaining what it means that your film is in “turnaround.” What’s worse is that even more lawsuits may arise if your film makes money. The investors may not understand that their piece does not include merchandising or DVD sales or foreign sales, etc. They may not be aware of the recoupment that has to take place first before a dollar gets distributed to investors. When you go out to the masses for money and they invest 5% of their income, they may have some pretty high expectations that will need to be managed upfront. Because of this wide open frontier, the SEC is requiring film productions seeking more than $500,000 through crowdfunding to also provide audited financial statements. Those can be very expensive and should be factored into how much money you need to raise – you will likely need to raise money to cover the costs of the statements. Finally, the production entity accepting the investment remains liable for material misstatements and omissions in information provided in a crowdfunding offer so you better make sure what the broker is telling folks is accurate and approved by your company.5. When will this go into effect?
All the rules and regulations surrounding the JOBS Act are expected to roll out sometime in 2014. The SEC and FINRA (which regulates brokers and will regulate the JOBS Act funding portals) are cranking out regs as we speak, but the wheels move slowly in DC. There are many requirements that re already on the books which film production companies can begin to put into place to make themselves eligible for this funding model: (A)They will have to file extensive disclosure with the SEC and provide to the investors and the relevant broker or funding portal information regarding (1) its name, address and website address; (2) the names of its directors and officers and each person holding more than 20 percent of its shares; (3) its business and its anticipated business plan; (4) its financial condition; (5) the stated purpose and intended use of the proceeds of the offering; (6) the target offering amount, the deadline to reach the target amount and “regular updates” on the progress of the offering; (7) the price (or the method for determining the price) of the securities offered and a reasonable opportunity to rescind the purchase commitment if the final price is not determined at the time the commitment is made; (8) a description of the ownership and capital structure of the production entity and the terms of the offered securities (including how the offered securities have been valued and the risks of being a minority owner); and (9) such other information as the SEC may require • not advertise the terms of the offering, other than to direct investors to the funding portal or broker;(B) not compensate anyone to promote the offering unless the person clearly discloses the receipt of compensation in connection with any such promotional communication (pursuant to rules to be adopted by the SEC); (C)file at least annually with the SEC (and provide to investors) reports of the results of operations and financial statements (as specified by SEC rule); and (D)comply with such other requirements as the SEC may prescribe. That last item requires film production companies to constantly monitor changes in SEC regulations in this area.6. How likely is this to help new filmmakers?
The jury is out on that as the JOBS Act has not been fully implemented. While some are saying that this will open the door for young filmmakers to find money for their films, I think it is unlikely that this will really revolutionize raising money. Much of what the Act will require of your film production company are the same things you need to do if you intend to raise money from accredited investors. You will need initial capital to get yourself ready to crowdfund through the JOBS Act so you still will have to go to your parents, extend family and friends for initial seed money. You will then have to find a way to get your movie noticed from all of the other offerings out there. You are also not going to land a “big fish” in this fashion. Your investments will mostly be in the $100 to $1,000 range so it will take time to get to the level you will need to start production. Accredited investors are mostly interested in movies that are going to go mainstream, so that $1 Million cap will limit that ability as a movie with that budget is not likely to be “union-made” and many accredited investors would shy away from that. At the same time, this Act will help “professionalize” start-up film companies and weed out or kill off hobbyists. To go this route, you really gotta want it and have thought out budget, business plan, and scheduling. It may also be a way to finish off or polish up that small film someone made that got some notice but needs post-production work to make it theater-ready. The bottom line is that this is not a cure-all for the money issues facing young filmmakers, but it may provide an infusion of cash to get you to the starting line or to the finish line. You may still need to do it the old-fashioned way in between.

3 Comments

” Much of what the Act will require of your film production company are the same things you need to do if you intend to raise money from accredited investors”

And when doing a private placement don’t you give disclosure in your PP memorandum similar to what you would do for registered securities in a registration statement ? I mean you still worry about 10b-5. It’s expensive whether registered or not. So I don’t expect this new law will be much cheaper. Maybe you could do a $150 “program” for drafting the appropriate disclosure documents for funding using this new Act.

Only accredited investors — individuals with net worth of more than $1 million, excluding their residences, and/or income of more than $200,000 — will be eligible to invest in these businesses. But advertising these opportunities will enable businesses seeking capital to reach more of these investors.